MG106 Strategic Management
London School of Economics and Political Science
June 27, 2025
1997: An industry dominated by giants…
…yet one small player thrives 🎯
1️⃣ How and why has the express mail industry structure evolved?
2️⃣ How have the changes affected small competitors?
3️⃣ How has Airborne survived and prospered?
4️⃣ What are the sources of Airborne’s competitive advantage?
Framework: Five Forces + Business Model Analysis
Task: 15 minutes, discuss questions in teams 🕐
Focus on what’s changed over time
The Early Days (1970s) 🌅
The New Reality (1990s) 🏭
What drove this transformation?
The vicious cycle of competition 🔄
Hub automation: UPS Louisville → $860 million 🏭
Aircraft: One Boeing 767 → $90 million ✈️
IT catch-up: UPS (1990-95) → $3 billion 💻
Annual advertising: FedEx → $138 million/year 📺
Can small players afford ANY of this?
The Pattern 🔄
The Result 📊
Classic endogenous sunk costs
Key insight: Competition itself changed the industry structure 🎯
FedEx (1973) 💜
UPS (1907) 🤎
But then came the “Parcel Wars”… ⚔️
The Convergence:
Only 2 differences remain:
Culture (history) + Ground network (UPS only) 🚚
The Victims 📉
Operating margins? Single digits 😰
Why They Failed ❌
Small + Undifferentiated = Dead
Yet Airborne thrives with 16% share… HOW? 🤔
The Death Spiral ☠️
Unless you find a different way to compete…
The Numbers 📈
The Puzzle 🧩
How does a company 1/9th the size of FedEx survive when others died?
Let’s analyze their model…
Hint: It’s not about competing head-to-head 🎯
YES to ✅: Large volume • Predictable • Dense routes • B2B • Price-sensitive
NO to ❌: Residential • Seasonal • Rural • Consumer • “Absolutely positively”
Paradox: Targeting the MOST powerful buyers? 🤔
Answer: They can serve them differently
| Activity | FedEx/UPS | Airborne |
|---|---|---|
| Aircraft | New planes 💰 | Used planes ✈️ |
| Hub | Automated 🤖 | Manual sort 👷 |
| Airport | Pay landing fees | Own airport |
| Delivery | Employees | 65% contractors |
| Marketing | $138M ads | Zero ads 📵 |
| Service | 10:30 AM | Noon delivery 🕐 |
Predictable volume → Manual sort works ✓
B2B focus → No consumer ads needed ✓
Dense routes → Contractors reliable ✓
Result: 30% by truck, 80% plane utilization 🎯
You can’t copy just one piece!
FedEx: $8.55/letter → Price: $9.00
Airborne: $6.88/letter → Price: $7.20
How? Contractors • 80% utilization • No ads • Lower overhead
But watch marginal costs… ⚠️
Cost advantages 💰: Avoided fixed costs • Variable > Fixed • 80% utilization
Strategic advantages 🎯: Perfect customer fit • Competitor inflexibility • System coherence
Lower costs ARE the strategy - but only for THEIR customers
The catch? High marginal costs make them vulnerable ⚠️
Average Cost ✅
Airborne wins by ~20%
Marginal Cost ❌
Airborne likely loses
In a price war, Airborne dies!
Critical: Must keep FedEx/UPS uninterested in their segment 🛡️
Now: Distance pricing • Giants eyeing their segment • Tech demands ↑
Future: Scale race continues • Need ground network? • RPS partnership?
💣 October 1997: FedEx buys RPS for $2.4B
Now what? 😰
Strategic: Industry evolution creates niches • Focus enables survival • Low cost ≠ Safe
Analytical: Track industry dynamics • Map business models • Analyze costs (average + marginal)
Epilogue: DHL bought Airborne (2003) for $1.2B
Not bad for the little guy! 💪
Consider: Another David vs Goliath story?
Key question: What happens when the focused player grows? 🤔